As the U.S. market continues to boom, new investment management firms can have billions of dollars under management after only a few years -- or even months -- in business.
Merger activity and succession planning at independent firms has led in recent years to the displacement of portfolio management teams that sometimes go on to start their own firms.
Teams that have started their own firms attribute their success, in large part, to support from retirement boards and industry consultants, many of whom have been willing to give them credit for performance accomplished at their previous companies.
Some of the successful startups established under such circumstances include:
* Osprey Partners Investment Management LLC, Shrewsbury, N.J., which has $2.2 billion under management in value equity and fixed-income assets after 11 months in business. About $1.8 billion of which is for institutional, tax-exempt clients.
* Zak Capital Inc., Minneapolis, manages $655 million in midcap and small-cap equity after two years in business. About 70% of the assets followed founder Suzanne Zak from her previous firm in the first year.
* Metropolitan West Asset Management LLC, Los Angeles, has more than $4 billion in fixed income -- including $2.8 billion in U.S. institutional tax-exempt assets -- after three years in business.
Small firms are marketing the idea that many large firms have expanded their focus well beyond institutional asset management.
"What does the investor care if the firm has 50 people in Tokyo?" said Chris Scibelli, a partner at MetWest. "We represent the opposite of the merger activity. We don't want to be all things to all people and cross-sell insurance. And our vision of that niche catches the attention of investors."
Also, it is easier now for small firms to gather the complex information they need.
"You don't need a big support staff," Ms. Zak said. "You can go on the Internet, hold conference calls and it's easy to get what you need. The important thing for the clients and consultants is to see that the same decision-making people are in place."
From Fox to Osprey
Osprey was formed last summer by seven portfolio managers from Fox Asset Management Inc., Little Silver, N.J. About $1.5 billion of the firm's $2.2 billion total under management comprises allocations from previous Fox clients.
Among the clients that shifted assets to Osprey from Fox are:
* The $600 million Orlando (Fla.) Public Employees' Retirement System, which took $45 million away from Fox following the defection and gave $18 million to Osprey and $27 million to Legg Mason Inc.;
* The City of Wethersfield, Conn., which hired Osprey this spring to manage the $6 million in domestic fixed income that Fox previously handled for the city's $47 million defined benefit plan; and
* The $42 million Sturgis (Mich.) Employees' Retirement System, which gave Osprey $20.5 million earlier this year, half of the $41 million small-cap value allocation it took away from Fox. Alliance Capital received the other $20.5 million.
"A number of accounts were wavering, but quite a few came our way," said Paul Stach, an Osprey principal and the firm's fixed-income manager. "Others took some time."
Osprey has three investment styles: large-cap value, small-cap value and intermediate fixed income. About $1.4 billion is invested in large-cap equity, Osprey's largest business.
Osprey's large-cap value investments have returned 14.2% year to date as of June 30, compared with 12.4% for the Standard & Poor's 500 stock index and 12.9% for the Russell 1000 Value index.
The group continues to be headed by John Liang, chief investment officer, and still includes Jerry Fischer, Van Whisnand, Douglas Salvati, Russell Tompkins and Terry Potter.
From IAI to Zak
Ms. Zak started Zak Capital in May 1997, shortly after her departure from Investment Advisers Inc., Minneapolis, where she had been a midcap growth equity manager.
She manages $655 million in midcap and small-cap growth assets, 70% of which is for institutional, tax-exempt clients. About $460 million in client accounts followed her to her new firm from IAI, including the $5 billion Missouri State Employees Retirement Association, Jefferson City, Mo., for which she manages about $120 million.
Ms. Zak did not have a non-competition agreement with IAI.
She recently was hired by the Fairfax County (Va.) Retirement System to manage $12 million for the $600 million Uniformed Retirement System.
About 68% of total assets are invested in midcap stocks and 30% in small-cap to midcap issues. About 2% of total assets are invested in the Zak Minotaur Fund LP, a midcap and small-cap fund launched a year ago for high-net-worth clients.
Zak's midcap growth composite was down 0.43% year to date as of June 30, compared with 10.3% for the Russell Midcap stock index benchmark. Since inception on May 1, 1997, the composite has returned 21.7% compared with 22.1% for the benchmark.
Zak's small-cap and midcap growth composite was up 0.1% year to date as of June 30, compared with 10.9% for the Russell 2500 index benchmark. Since inception, the composite has returned 20%, compared with 17.4% for the benchmark.
Ms. Zak manages assets along with managing director Tina Michael, a former IAI midcap manager. Ms. Zak said she intends to stop taking separate account assets at $1 billion.
From Hotchkis to MetWest
MetWest was created by five bond managers who fled Hotchkis & Wiley in the summer of 1996, just as Hotchkis was being sold to Merrill Lynch & Co.
MetWest now has more than $4 billion in total assets under management, at least $1 billion of which is believed to have followed the managers from Hotchkis & Wiley.
Hotchkis sued the departing managers shortly after the defection, and the case was settled several months later. While details of the settlement are not known, MetWest is believed to have made a payment to Hotchkis.
MetWest Asset Management handles about $1.5 billion in total return core bond portfolios, $1.2 billion in intermediate-duration bonds, $1 billion in low-duration and $400 million in enhanced S&P 500 stock index portfolios.
MetWest also has launched the Metropolitan West Funds family, which contains about $390 million in three funds: total return, low duration and AlphaTrack 500 fund.
The total return portfolio was down 0.22% year to date as of June 30 compared with -1.39% for the benchmark, the Lehman Brothers Aggregate bond index. For one year, as of June 30, the core portfolio was up 5.6%, compared with 3.1% for the benchmark. Three-year annualized performance for total return is 8.9%, compared with 7.2% for the benchmark.
The Skillman Foundation, Detroit, hired MetWest recently to manage a $28 million active bond allocation. The money came from reducing a Lehman Aggregate index fund managed by Barclays PLC.
Tad Rivelle and Laird Landmann continue to lead the group, which still includes Stephen Kane, Lara Malpagano and Brian Loo.